This invention relates to computerized trading of securities and, more particularly, to computerized optimization of allocation of securities from pools to contracts.
A mortgage-backed security is an undivided interest in a set or "pool" of mortgages. These securities are issued primarily by agencies such as the Government National Mortgage Association (GNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the Federal National Mortgage Association (FNMA). For a general discussion of mortgage-backed securities, see, e.g., M. Stigum et al., "Mortgage Pass-Through Securities: Ginnie Maes, Fannie Maes and Freddie Macs", in The Dow Jones-Irwin Guide to Bond and Money Market Investments, Dow Jones-Irwin, 1987, pp. 241-258.
Typically, a professional trader handles a large number of mortgage-backed securities and of buy/sell contracts, and the trader's assigning or allocating of securities from pools to contracts is subject to numerous constraints in the form of rules published by the Public Securities Association (PSA). To the trader the problem is to find the most profitable allocation without violating any PSA rule, and mindful of certain preferences, e.g., pool quality ranking and the composition of residual pool inventory.
Most buy/sell contracts are "forward contracts" (i.e., for future delivery) which are filled or allocated monthly on a specific settlement day or "pool day"; for each type of security there is a designated date. The traders maintain an inventory of securities from which orders may be satisfied. Since only a small amount of pool information is available at the beginning of a pool day, only a small number of sell contracts can be pre-allocated. As pre-allocation information is communicated among traders, additional sell contracts may be allocated from the incoming buy contracts.
Under the PSA rules it is financially advantageous to the trader to postpone the allocation process to as short a time as possible before the pool-day deadline. As a result, most of the allocations occur in a rush at the end of the pool day. The sheer volume of these transactions may prevent a trader from performing a detailed analysis, resulting in sub-optimal allocations. And, even though it may be advantageous to re-allocate pools in the process due to changing market conditions, the cost of doing this manually may be too high. The problem then is to design efficient computer methods for allocating security interests from pools to contracts.